Credit culture can be defined as the bondage that keeps the credit method united and forms the crucial foundation of the credit discipline. It refers to the collection of principles, actions, deterrents and rewards within the lending organization. Credit culture can also refer to the institutional priorities, traditions and philosophies surrounding lending or credit decisions. Every bank has a credit culture that can either be defined by the senior manager, or be conceptualized overtime, informally.
The banking business is extremely risky. Banks are provided with funding from the accepted demand deposits. They issue credit for the financing business, which also includes the financing of long-term projects. Every lending entity usually develops specific practices for the risk management framework. Credit culture is often taken for granted by many of the lending institutions, but it is imperative to keep in mind that without a sound credit culture, the credit risk cannot be managed effectively.
An ideal banking culture is cultivated when every person knows what the objectives and goals of the bank is. There must be an appropriate atmosphere in the bank, which can be created when the CEO aids and delegates the work accordingly. There must be development in the leadership within the bank, and an urge to step up and take the responsibility for the decision made, whether it is good or bad.
In this context, four Cs can be highlighted that can help to build and maintain a strong credit culture. The first key is communication, that requires the flow of all the information, values, and expectations to move vertically, both ways in an organization. It brings everyone together and encourages them to perform better. This is the least expensive way to improve risk management and increase the effectiveness and efficiency. The second is consistency, which requires everyone to be treated equally. It is about the consistent application of lending, and underwriting the policies or pricing the loan structure. Third, there is competency, the loan officers should step forward and educate themselves. They must have complete knowledge of the loan policy, and should understand the appetite of the bank. Last but not the least, collaboration is also essential, that is, everyone must work together. For the executive level, collaboration also provides the opportunity to teach and mentor. It helps to produce better decisions, thereby improving risk management.
When it comes to the development of a strong credit culture in India’s financial institutions, the Reserve Bank of India (RBI) enforces a regulated approach towards building a strong credit culture. RBI has a system of foundation risk management, but India’s credit growth rate has unfortunately remained low. The credit growth rate is not only weak, but the state of public sector bank balance sheets is also feeble, and an overall low appetite of credit in turn leads to low credit growth.
There are certain elements that need to be followed for a strong credit culture. Credit culture starts at the top, that is, at the level of the CEO and the executive management, who set the tone. They should frequently talk about the importance of managing the lending activities. Everybody owns risk; credit risk is not just the responsibility of those in underwriting or adjudication. There must be a strong reinforcement in the system, so that everyone who is involved in the lending process is subjected to be equipped with risk management. Systems and processes must be robust; strong controls must be there to ensure proper measurement, inspection and accountability. There must be room for judgement by experienced bankers. Everybody in the lending process should be educated regarding underwriting skills, products, laws and regulations, and bank policy. The management should ensure that the bank focuses only on the lending segments of core competency. The credit message must be reinforced. The business growth must portray diversification and granularity. Policies and limits are to be followed and not compromised on, even when revenue opportunities could be missed.
The senior credit officers and credit policy officers need to identify all the descriptive statements that are most applicable to the organization’s credit culture. If the perception is not matching the institution’s goals, it would imply that the lenders are leading to the weakening of the bank’s credit policies.
Considering the complex and extensive nature of the banking business, it can be said that the credit culture plays an indispensable role in lending institutions. It is essential to embrace the consequences of all factors, related to credit quality, credit extension and recurrent cyclical patterns. A strong credit culture represents the foundation of credit risk management as it guides all the credit decisions. It gives the firms competitive advantage in the marketplace. Hence, it can be noted that a strong credit culture defines a bank’s survival and profitability.
Picture Courtesy- Kr-Asia